Are you looking to invest in Jacksonville real estate?
As is the case with all investments, it is always important to do your due diligence. This will ensure that you’re well equipped to get the best return on investment possible.
For example, it’s important to know the state of the market before investing; to see both the short- and long-term potential of a property.
Another aspect of the research process that challenges many real estate investors is accurately projecting the financial needs of their Jacksonville property.
Efficient budgeting oftentimes requires experience to be done properly. That’s because there are common financial surprises along the way that cause many new investors to make budgeting mistakes.
Keep on reading to learn about the six mistakes that real estate investors make when budgeting for their rental property. After reading this article, you’ll have a deeper understanding of financial management to make more sound decisions.
1: Ignoring maintenance costs
Every budget needs to account for regular maintenance. Proper maintenance keeps the property’s value.
When it comes to budgeting for maintenance, you could follow one of these principles:
- 1% Rule. According to this principle, you should budget 1% of the property’s value per year for maintenance. For example, if your property’s value is $150,00, your yearly maintenance budget is $1,500.
- 5x Rule. Budget 1.5 times the monthly rent for annual maintenance. Let’s say your property’s monthly rent is $1,100. Then the yearly maintenance budget should be $1,650.
- Square Footage Rule. Budget $1 for every square foot on annual maintenance expenses.
Remember, these are just general guidelines and your amount spent can vary depending on your properties need for maintenance.
2: Not factoring in administrative expenses
Every landlord should anticipate some administrative costs when it comes to managing their own property.
At first, you might feel like they are trivial, small expenses. But be warned that everything from driving to and from your property, to bookkeeping and filing tax returns adds up.
Some landlords feel that it’s being overly calculated to factor in these expenses. But even the simplest administrative duties often require time and money.
When you start to add up all of these small costs, you’ll soon realize their financial impact on your business.
3: Forgetting repair costs
Repairs aren’t the same as maintenance. It’s a separate expense. That means you need to budget accordingly.
Unexpected repairs are part of real estate investing. If you own an older property, these repairs can’t be a complete surprise to you as the older things are, the higher the chances of them needing upgrades.
Experts suggest budgeting a very small percentage of the property’s total value for annual repair expenses. It’s important not to postpone any maintenance, as neglected maintenance often results in more repairs being needed.
4: Not budgeting for property management
Many beginner investors don’t realize the number of tasks and responsibilities they as a landlord have to do on a regular basis to have a chance at a steady flow of income. Landlords do much more than just sign agreements and collect rent. You need to be sure that you have enough time to invest in running a successful rental business.
Otherwise, you should budget for the services of a property management company. You can be certain that they are handling the screening process, the legal responsibilities, and among other things, the marketing strategy.
Property management company’s services amount to a small percentage of the total rental income. But realizing how much time and money it saves landlords makes the decision quite easy for them.
5: Overlooking the vacancies
Being too optimistic about the vacancies is one of the real estate investors’ top mistakes.
Your tenants may have had specific reasons for moving that you could try to fix.
It’s recommended to designate a percentage of the rent as the budget for dealing with vacancies. This way, you can properly handle them and quickly get them filled with tenants again.
6: Neglecting the exit costs
Let’s say your property is X and you owe Y. Now you might think that your equity is X – Y, but in reality, it’s not.
You need factor in the costs linked to cash out and liquidation.
If we take a look at the scenario again, if your property is worth X, you might expect exit costs to be around Z. Therefore, you’re left with somewhere around X – Y – Z.
The bottom line: what are typical rental property budgeting mistakes?
When it comes to real estate investors and the responsibility of budgeting their rental property, there are a lot of mistakes that are made.
Among them are the 6 most common ones – ignoring maintenance costs, not factoring administrative costs, forgetting repair costs, not budgeting for property management, overlooking vacancies, and neglecting exit costs.
By being aware of these mistakes, you as an owner of a property in Jacksonville can avoid wasting time, money, and energy.